Supreme Court New South Wales Medium Neutral Citation: Larkden Pty Limited -v- Lloyd Energy Systems Pty Limited [2011] NSWSC 1305 Hearing dates: 5 October 2011 Decision date: 05 October 2011 Jurisdiction: Equity Division - Commercial Arbitration List Before: Hammerschlag J Decision: Pursuant to s 440D of the Corporations Act 2001 (Cth), leave to proceed given to the plaintiff to bring recognition and enforcement proceedings under s 35 of the Commercial Arbitration Act 2010 (NSW) Catchwords: CORPORATIONS - COMMERCIAL ARBITRATION - S 440D of the Corporations Act 2001 (Cth) - an application for leave to bring and continue proceedings against a company in voluntary administration for recognition and enforcement of an arbitral award pursuant to s 35 of the Commercial Arbitration Act 2010 (NSW) - nature of discretion to be exercised - relevant circumstances - leave granted Legislation Cited: Corporations Act 2001 (Cth) Commercial Arbitration Act 2010 (NSW) Cases Cited: Larkden Pty Ltd v Lloyd Energy Systems [2011] NSWSC 268 Foxcroft v The Inc Group Pty Ltd (1994) 15 ACSR 203 Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1998) 30 ACSR 38 Re Atlantic Computer Systems PLC [1992] Ch 506 Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766 Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1997) 25 ACSR 757 Category: Principal judgment Parties: Counsel: Larkden Pty Limited - Plaintiff Lloyd Energy Systems Pty Limited - Defendant Representation: T.M. Mehigan [Plaintiff] C.R.C. Newlinds SC with N.M. Bender [Defendant] Solicigtors: Allens Arthur Robinson [Plaintiff] Kemp Strang Lawyers [Defendant] File Number(s): 2010/416290 Judgment 1His Honour: This is an application pursuant to s 440D(1) of the Corporations Act 2001 (Cth) ("the Corporations Act") for leave to bring and continue proceedings against a company under voluntary administration. BACKGROUND 2Between 25 July and 3 August this year there proceeded before Mr Stephen Wallace White (the arbitrator) an arbitration between the plaintiff (or Larkden) and the defendant (or Lloyd). Lloyd was claimant and cross-defendant. Larkden was respondent and cross-claimant. 3The factual background to the dispute is set out in Larkden Pty Ltd v Lloyd Energy Systems [2011] NSWSC 268 in which I ruled on a challenge to the arbitrator's jurisdiction ("the first judgment"). It is not necessary to restate the facts beyond what I said there. Save where otherwise stated, defined terms in the first judgment have the same meaning here. 4On 7 September 2011, the arbitrator published what he described as "draft reasons" dealing with the various claims and cross-claims motivated by Larkden and Lloyd respectively in the arbitration. 5In a section of his reasons entitled Relief-Tribunal Decision , the arbitrator determined, relevantly, as follows: 40.1 The parties should have the relief that they sought in their respective claims in which they were successful including specific performance. 40.2 However, whilst the Respondent is entitled to, amongst other things, a suitably moulded constructive trust the Tribunal's view is that a declaration against a third party to the arbitration, namely Solfast, or a declaration in rem is not appropriate or available. 40.3 That said having regard to the admissions made in paragraph 22 of the Reply the Tribunal is prepared if requested to make orders that the Claimant holds its shares in Solfast on trust for the Respondent or such other suitably moulded relief. 40.4 Further, the Tribunal is only prepared to find that the Respondent's submissions in relation to the constructive trust and fiduciary duties only extend as would arise ordinarily by reason of one holding the legal title of another as bare trustee and no further. 40.5 The tribunal's view is that parties should now agree on appropriate orders and if necessary the Tribunal will hear further submissions on this issue. 6On 9 September 2011, Larkden's lawyers wrote to Lloyd's lawyers seeking consent to a form of orders. 7On 13 September 2011, unbeknown to Larkden, the directors of Lloyd resolved that in their opinion, Lloyd was insolvent or likely to become insolvent at some future time and resolved that Ronald John Dean-Willcocks and Adam Farnsworth be appointed voluntary administrators ("the administrators") pursuant to s 439A of the Corporations Act. 8Larkden was informed of this development the following day. 9On 20 September 2011, after an exchange of correspondence in which Larkden urged the arbitrator to make orders and the administrators sought to defer the making of orders, the arbitrator published further reasons and made the following orders ("the Award"): (1)The Tribunal determines and declares that, pursuant to clause 5.4(a) of the Licencing Agreement dated 16 November 2001 between the Claimant and the Respondent ("the Head Licence"), the Respondent is entitled to be made owner of, and have assigned to it, all the rights, title and interest in the inventions embodied in: (a)the Solfast Patent Application (being PCT/AU2009/001278) ("the Solfast Patent Application"); and (b)the patent applications ("the Assigned Patent Applications") set out in Exhibit C to the Patent Assignment and Settlement Agreement dated 4 March 2010 between Ausra Inc and the Claimant ("the Ausra Settlement Agreement") as may be amended from time to time in accordance with the Ausra Settlement Agreement. (2)The Tribunal determines and declares that the Claimant holds on constructive trust for the Respondent all its rights, title and interest in Solfast Pty Ltd (including its Solfast Pty Ltd shares) on behalf of the Respondent. (3)The Tribunal determines and declares that the Claimant holds on constructive trust for the Respondent all its rights, title and interest in the inventions embodied in the Assigned Patent Applications. (4)The Tribunal orders, pursuant to section 33A of the Commercial Arbitration Act 2010 (NSW), that the Claimant specifically perform clause 5.4(a) of the Head Licence by: (a)immediately procuring Solfast Pty Ltd to execute a deed of assignment in the form of the Annexure A to these orders; (b)taking all necessary steps to file and prosecute the Solfast Patent Application in the name of the Respondent; (c)irrevocably nominating the Respondent as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; and (d)taking all necessary steps to ensure that the Respondent's interests in the prosecution of the Assigned Patent Applications are protected and secured. (5)The Tribunal orders that the Claimant perfect the Respondent's interest in the Assigned Patent Applications by: (a)irrevocably nominating the Respondent as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; (b)taking all necessary steps to ensure that the Respondent's interests in the prosecution of the pending Ausra Patent Applications are protected and secured. (6)The Tribunal orders that the Claimant furnish the Respondent with all necessary assistance as requested by the Respondent from time to time, in relation to any proceedings the Respondent may take against Solfast and/or Areva including, without limitation, any proceedings under sections 32 and 36 of the Patents Act 1990 (Cth), such assistance to include (without limitation) providing the Respondent with all documents in the possession, custody or control of the Claimant necessary for the Respondent to prosecute any claims against Solfast and/or Ausra under sections 32 and 36 of the Patents Act 1990 (Cth). (7)Costs Reserved. (8)Liberty to Apply 10Section 440D(1) of the Corporations Act provides as follows: Stay of proceedings (1)During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except: (a) with the administrator's written consent; or (b) with the leave of the Court and in accordance with such terms (if any) as the Court imposes. 11Section 35 of the Commercial Arbitration Act 2010 (NSW) ("the Commercial Arbitration Act") provides as follows: Recognition and enforcement (1)An arbitral award, irrespective of the State or Territory in which it was made, is to be recognised in this State as binding and, on application in writing to the Court, is to be enforced subject to the provisions of this section and section 36. (2)The party relying on an award or applying for its enforcement must supply the original award or a copy of the original award. (3)If the award is not made in English, the Court may request the party to supply a translation of it into English. 12Section 36 of the Commercial Arbitration Act provides as follows: Grounds for refusing recognition or enforcement (1)Recognition or enforcement of an arbitral award, irrespective of the State or Territory in which it was made, may be refused only: (a)at the request of the party against whom it is invoked, if that party furnishes to the Court proof that: (i)a party to the arbitration agreement was under some incapacity, or the arbitration agreement is not valid under the law to which the parties have subjected it or, failing any indication in it, under the law of the State or Territory where the award was made, or (ii)the party against whom the award is invoked was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present the party's case, or (iii)the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognised and enforced, or (iv)the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or, failing such agreement, was not in accordance with the law of the State or Territory where the arbitration took place, or (v)the award has not yet become binding on the parties or has been set aside or suspended by a court of the State or Territory in which, or under the law of which, that award was made, or (b)if the Court finds that: (i)the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or (ii)the recognition or enforcement of the award would be contrary to the public policy of this State. (2)If an application for setting aside or suspension of an award has been made to a court referred to in subsection (1) (a) (v), the Court may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the party to provide appropriate security. 13On 26 September 2011, Larkden sued out of the Court a Summons, supported by a Commercial Arbitration List Statement, claiming the following relief: (1)Pursuant to section 440D(1) of the Corporations Act 2001 (Cth), leave to commence and prosecute these proceedings. (2)An order pursuant to section 35(1) of the Commercial Arbitration Act 2010 (NSW) recognising and enforcing the interim award made on 02 September 2011 by Stephen Wallace White (the Interim Award ) against the Defendant by making declarations and orders in the form set out in the Interim Award, namely: (a)a declaration that, pursuant to clause 5.4(a) of the Licensing Agreement dated 16 November 2001 between the Plaintiff and the Defendant (the Head Licence ), the Plaintiff is entitled to be made the owner of, and have assigned to it, all the rights, title and interest in the inventions embodied in: (i)the Solfast Patent Application (being PCT/AU2009/001278) (the Solfast Patent ); and (ii)taking all necessary steps to file and prosecute the Solfast Patent Application in the name of the Plaintiff; (iii)irrevocably nominating the Plaintiff as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; and (iv)taking all necessary steps to ensure that the Plaintiff's interests in the prosecution of the Assigned Patent Applications are protected and secured; (b)an order that the Defendant perfect the Plaintiff's interest in the Assigned Patent Applications by: (i)irrevocably nominating the Plaintiff as the Nominated Assignee of the Assigned Patent Applications and forthwith notifying Areva Inc in writing of the irrevocable nomination; (ii)taking all necessary steps to ensure that the Plaintiff's interests in the prosecution of the pending Ausra patent Applications are protected and secured; and (c)an order that the Defendant furnish the Plaintiff with all necessary assistance as requested by the Plaintiff from time to time, in relation to any proceedings the Plaintiff may take against Solfast Pty Ltd or Areva Inc, or both, including, without limitation, any proceedings under sections 32 and 36 of the Patents Act 1990 (Cth), such assistance to include (without limitation) providing the Plaintiff with all documents in the possession, custody or control of the Defendant necessary for the Plaintiff to prosecute any claims against Solfast Pty Ltd or Ausra Inc, or both, under sections 32 and 36 of the Patents Act 1990 (Cth). (3)An order that the hearing of this proceeding be expedited. 14The application for leave under s 440D(1) of the Corporations Act was heard on 5 October 2011. 15Mr T M Mehigan of counsel appeared for Larkden. Mr C R C Newlinds SC with Mr N M Bender of counsel appeared for the administrators. 16The administrators opposed the grant of leave. 17On conclusion of the hearing, I granted leave as sought and provisionally fixed the remainder of the Summons for hearing on 2 and 3 November 2011. 18At the instance of the administrators I also made orders under s 439A(6) of the Corporations Act extending the convening period provided in s 440A(1) for the holding of the second meeting of Lloyd's creditors. 19I now publish my reasons for granting leave. RELEVANT STATUTORY ENACTMENTS 20Part 5.3A of the Corporations Act is entitled "Administration of a company's affairs with a view to executing a deed of company arrangement". 21Section 435A of the Corporations Act describes the object of the Part in the following terms: The object of this Part is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a)maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b)if it is not possible for the company or its business to continue in existence-results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 22Section 436E of the Corporations Act provides for the convening of a first meeting of creditors within 8 business days after the administration begins. 23Sections 439A(1) and (2) of the Corporations Act require the administrator to convene a second meeting of the company's creditors within 5 business days before or within 5 business days after the end of the convening period, which in the present case is the period of 20 business days beginning on 14 September 2011. Under s 439A(6) of the Corporations Act, the Court may extend the period. 24Section 439C of the Corporations Act provides: At a meeting convened under section 439A, the creditors may resolve: (a)that the company execute a deed of company arrangement specified in the resolution (even if it differs from the proposed deed (if any) details of which accompanied the notice of meeting); or (b)that the administration should end; or (c)that the company be wound up. THE ADMINISTRATORS ' POSITION 25In an affidavit sworn 30 September 2011, Mr Dean-Willcocks reveals information, which he has thus far obtained from his investigations, about the potential of recoverable assets of Lloyd and its liabilities. He gives a summary of the time he has so far spent dealing with the arbitration issues, and provides information as to the costs so far incurred by him in doing so, excluding legal advisors costs and costs of staff in his office. 26He says that from discussions from some of the former directors of Lloyd (which presumably include Mr Geoffrey Kinghorn who resigned 14 September 2011), it appears that a Deed of Company Arrangement (DOCA) is to be propounded for the creditors to vote upon at the second meeting. He does not yet have such a proposal. 27He states that it may be necessary to extend the convening period to enable the administrators to complete investigations required to prepare the report under s 439A of the Corporations Act, including finalisation of his opinion on any DOCA proposal. He says that because of the distractions of the arbitral process (up to and post the Award) and these proceedings, a longer extension of the convening period may be required. Based on this, I extended the convening period for a little over two weeks. 28He provides certain information about transactions under which Lloyd gave its shares in Solfast as security to a company or companies associated with the former directors of Lloyd. The effect of these transactions may be that ownership or control of the Solfast shares may no longer reside with Lloyd. 29The administrators submitted that leave should be refused for the following reasons. 30Firstly, they submitted that if they were put to having to resist Larkden's claim for recognition and enforcement of the Award, they would, be deflected from other activities and incur costs. They put that leave will only be given in rare cases, and that this case does not display the required rarity value. 31Secondly, they submitted that they had the following good answers to Larkden's claims for recognition and enforcement of the Award: (a)The declarations and orders reflected in Orders 2 to 4 are "beyond the scope of the arbitrator's remit" as not reflecting adjudication of a dispute or disputes arising in connection with the Licensing Agreement; (b)Lloyd did not control Solfast or the Solfast shares and Solfast was not party to the arbitration so that the decree for specific performance claimed in the Summons could and would not be ordered; and (c)The Commercial Arbitration Act contemplates recognition and enforcement of only the whole, and not part only, of an arbitral award so that if there are grounds for refusing recognition or enforcement of part of an award, the Court must refuse to recognise and enforce the whole of it; and (d)The arbitrator displayed bias when he made his decision not to defer but proceeded to make the Award. 32Thirdly, they proffered an undertaking which they contended should provide sufficient comfort to Larkden that, subject to further agreement between the parties, they would not deal on behalf of Lloyd with the rights, title and interest in the inventions embodied in the Solfast Patent Application and the Assigned Patent Application and Larkden's share in Solfast Pty Ltd to the extent that it owns that share or is successful in recovering it from GENV. (The Assigned Patent Application is a reference to the Ausra patent application the subject of the Settlement Agreement referred to in para 19 of the first judgment. GENV is one of the companies associated with former directors of Lloyd). 33In support of their proposition that leave will rarely be granted, the administrators relied on what Young J (as his Honour then was) said in Foxcroft v The Inc Group Pty Ltd (1994) 15 ACSR 203. At 205, after pointing out that a company in administration is seeking to continue to trade and maximise its chances of remaining in business whereas a company in liquidation is one where the liquidator is seeking not to trade but to realise the company's assets as soon as possible for the best price to maximise return to creditors, his Honour said the following: The provisions of Pt 5.3a, as exemplified in sections such as 437D, 437F, 440C and 440D, provide that there shall be a complete freeze of proceedings against the company during the administration so that the administrator can have time to assess the situation, and the company's creditors have an opportunity to work out the net position and adopt an attitude under s 439C which will be in their common interest. To allow one creditor or potential creditor to proceed would not only take the administrator's attention from what he needs to do under the division in a relatively short period of time, but it would also involve costs in running the legal action on behalf of the administrator, as well as perhaps giving the claimant some advantage over the other creditors or potential creditors. Accordingly, it seems to me that an application under s 440D will rarely be granted. It may be that where the company is insured against the liability the subject of the proceedings, the administrator will ordinarily consent or the court will give conditional leave, but outside this field it is hard to see situations where it would be proper to grant leave, though doubtless there are such situations. 34They also referred to Brian Rochford Ltd v Textile Clothing and Footwear Union of NSW (1998) 30 ACSR 38 in which Austin J said, at 45, that the Court will respond cautiously to an application for leave having regard to the structure and purpose of Pt 5.3A of the Corporations Act. 35In Re Atlantic Computer Systems PLC [1992] Ch 506 at 541, the English Court of Appeal, in considering a statutory analogue to s 440D, observed that the discretion given by Parliament is at large. The Court pointed out that it was not for the Court "to cut down that discretion...or...to confine it within a straight jacket". 36I respectfully take a view different to that of Young J and Austin J. It seems to me that an approach which commences with an assumption that leave will only rarely be granted or that the Court must approach this type of application with a degree of caution greater than that with which it would approach the exercise of any other discretion within a particular statutory context where it must be satisfied that appropriate circumstances exist for the making of an order imposes upon the applicant a standard higher than that which the section requires. This is an unwarranted confinement of the discretion. 37The policy underlying Pt 5.3A, as evinced by s 435A, is to maximise the chances of the beleaguered company staying alive. 38The stay of proceedings imposed by s 440D may facilitate the achievement of this object, amongst others, by (a)affording the administrator time to assess and report on the company without the distraction of the proceedings; (b)putting a brake on legal and associated costs; (c)allowing time for the development of proposals which might preserve the value of the company as a going concern; (d)giving the creditors time to consider their position for the purposes of the creditors' meeting; and (e)in appropriate circumstances, preventing a creditor from obtaining some advantage over other creditors or potential creditors. 39Whilst the discretion under s 440D must be exercised with the objects of the Part in mind, it remains one at large. A stay is the starting point. There must be circumstances which warrant its displacement. 40Every application must be considered on its own circumstances. There are infinite possible scenarios. There may be a flurry or a dearth of meritorious applications. Those circumstances need have no particular quality of rarity. 41Counsel's research efforts did not uncover any decision in which an application for leave to bring or continue Court proceedings against a company in voluntary administration to enforce an arbitral award has been considered. 42It is to be observed that arbitral proceedings are not a "proceeding in a court" within s 440D(1). No stay of them is brought about by the appointment of an administrator: Auburn Council v Austin Australia Pty Ltd (2004) 22 ACLC 766. Parliament cannot be taken inadvertently to have excepted arbitration proceedings from the stay, even though such proceedings may be as distracting, time consuming and expensive for an administrator as curial ones. 43As the High Court recently pointed out, in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37 at [18] and following, arbitral proceedings involve more than the performance of private contractual arrangements between the parties. The statutory regime involves the exercise of public authority whether by force of the statute itself or by enlistment of the jurisdiction of this Court. 44It is unlikely that Parliament intended to disregard the distraction and cost considerations in relation to principal arbitral proceedings but nevertheless intended that they should be given weight when it comes to recognition and enforcement of an award which is the culmination of those proceedings. 45Moreover, s 36 of the Commercial Arbitration Act provides that recognition or enforcement of an arbitral award may only be refused in defined circumstances. A stay, no doubt, is not a refusal but it does constitute an impediment to seeking recognition or enforcement. 46In any event, whatever the outcome of the present proceedings, a stay of execution of any order for specific performance is not precluded if appropriate circumstances are shown. 47In the present case the distraction value to the administrators is minimal. The costs will be modest, compared to the arbitration proceedings themselves. Presently there is no DOCA proposal. 48Additionally, the convening period for the second meeting of creditors has been extended which itself relieves time pressure on the administrators. 49There is little factual material to be relied upon in the foreshadowed proceedings that is not readily available. Counsel's estimate is that the hearing will take a day, perhaps a little more. 50There is no suggestion that recognition and enforcement of the Award will allow Larkden to steal a march over any other creditor or potential creditor. 51A further factor in favour of the grant of leave is that Larkden is seeking to vindicate rights of an essentially proprietary nature. There is no good reason why the interests of unsecured creditors should be a barrier to Larkden at least seeking vindication of those rights; see Re Atlantic at 541. Consistently with this approach, in Pioneer Water Tanks (Australia 94) Pty Ltd v Delat Pty Ltd (1997) 25 ACSR 757, leave was given to a party to bring patent infringement proceedings where administrators were asserted to be conducting the business in a way which infringed the applicant's patents. 52The propositions which the administrators put as providing answers to Larkden's claim for recognition and enforcement are largely ones of law, involving questions of construction of the Commercial Arbitration Act and the agreement. Although they are fairly narrow, they are not properly susceptible to summary assessment in the context of the present type of application. For example in answer to the administrators' proposition that the Commercial Arbitration Act contemplates recognition and enforcement only of the whole of the Award, Larkden points to s 36(1)(iii) as providing a complete response. 53Further, the administrators intend to lead some factual evidence although within a narrow compass. 54I do not think that the undertaking proffered by the administrators provides an answer. Firstly, it is heavily conditioned on the unspecified extent to which Lloyd owns the Solfast share or is successful in recovering it from GENV. Secondly, it does not provide a reason why Larkden should not be able to seek recognition and enforcement of its primarily proprietary interests, especially in the context of the limited grounds upon recognition and enforcement may, under s 36(1) be refused. 55There are weighty considerations in favour of granting leave and very little to be said in favour of refusing it. 56It is appropriate to grant the leave sought. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 November 2011